Internal & External Analysis

SWOT Analysis

SWOT is an acronym used to describe the particular Strengths, Weaknesses, Opportunities, and Threats that are strategic factors for a specific company. A SWOT should represent an organizations core competencies while also identifying opportunities it can not currently use to its advantage due to a gap in resources.

The SWOT analysis framework has gained widespread acceptance because of its simplicity and power in developing strategy. Just like any planning tool, a SWOT analysis is only as good as the information that make it up. Research and accurate data is vital to identify key issues in an organization’s environment.

Assess your market:

What is happening externally and internally that will affect our company?

The Internal Analysis of strengths and weaknesses focuses on internal factors that give an organization certain advantages and disadvantages in meeting the needs of its target market. Strengths refer to core competencies that give the firm an advantage in meeting the needs of its target markets. Any analysis of company strengths should be market oriented/customer focused because strengths are only meaningful when they assist the firm in meeting customer needs. Weaknesses refer to any limitations a company faces in developing or implementing a strategy (?). Weaknesses should also be examined from a customer perspective because customers often perceive weaknesses that a company cannot see. Being market focused when analyzing strengths and weaknesses does not mean that non-market oriented strengths and weaknesses should be forgotten. Rather, it suggests that all firms should tie their strengths and weaknesses to customer requirements. Only those strengths that relate to satisfying a customer need should be considered true core competencies.(Marketing and Its Environment, pg 44)

The following area analyses are used to look at all internal factors effecting a company:

The External Analysis takes a look at the opportunities and threats existing your organizations environment. Both opportunities and threats are independent from the organization. You can differenciate between strengths/weakness and opportunities/threats is to ask this essential question: Would this be an issue if the organization didn’t exist? If yes, it is an issue that is external to the organization. Opportunities are favorable conditions in an organization’s environment that can produce rewards if leveraged properly. Opportunities must be acted on if the organization wants to benefit from them. Threats are barriers presented to organization which prevent them from reaching their desired objectives.

The following area analyses are used to look at all external factors effecting a company:

The SWOT Matrix helps visualize the analysis. Also, when executing this analysis it is important to understand how these element work together. When an organization matched internal strengths to external opportunities, it creates core competencies in meeting the needs of its customers. In addition, an organization should act to convert internal weaknesses into strengths and external threats into opportunities.

Can these competitors be grouped into strategic groups on the basis of assets, competencies, or strategies?

Who are potential competitive entrants? What are their barriers to entry?

Evaluate

What are their objectives and strategies?

What is their cost structure? Do they have a cost advantage or disadvantage?

What is their image and positioning strategy?

Which are the most successful/unsuccessful competitors over time? Why?

What are the strengths and weaknesses of each competitor?

Evaluate competitors with respect to their assets and competencies.

Size and Growth What are important and potentially important markets? What are their size and growth characteristics? What markets are declining? What are the driving forces behind sales trends?

Profitability For each major market consider the following: Is this a business are in which the average firm will make money? How intense is the competition among existing firms? Evaluate the threats from potential entrants and substitute products. What is the bargaining power of suppliers and customers? How attractive/profitable are the market now and in the future?

Cost Structure What are the major cost and value-added components for various types of competitors?

Distribution Systems What are the alternative channels of distribution? How are they changing?

Market Trends What are the trends in the market?

Key Success Factors What are the key success factors, assets and competencies needed to compete successfully? How will these change in the future?

Environmental Analysis An environmental analysis is the four dimension of the External Analysis. The interest is in environmental trends and events that have the potential to affect strategy. This analysis should identify such trends and events and the estimate their likelihood and impact. When conducting this type of analysis, it is easy to get bogged down in an extensive, broad survey of trends. It is necessary to restrict the analysis to those areas relevant enough to have significant impact on strategy.

This analysis is divided into five areas: economic, technological, political-legal, sociocultural, and future.

Technological To what extent are existing technologies maturing? What technological developments or trends are affecting or could affect our industry?

Government What changes in regulation are possible? What will their impact be on our industry? What tax or other incentives are being developed that might affect strategy development? Are there political or government stability risks?

Sociocultural What are the current or emerging trends in lifestyle, fashions, and other components of culture? What are there implications? What demographic trends will affect the market size of the industry? (growth rate, income, population shifts) Do these trends represent an opportunity or a threat?

Future What are significant trends and future events? What are the key areas of uncertainty as to trends or events that have the potential to impact strategy?

Internal Analysis Understanding a business in depth is the goal of internal analysis. This analysis is based resources and capabilities of the firm.

Resources A good starting point to identify company resources is to look at tangible, intangible and human resources.

Tangible resources are the easiest to identify and evaluate: financial resources and physical assets are identifies and valued in the firm’s financial statements.

Intangible resources are largely invisible, but over time become more important to the firm than tangible assets because they can be a main source for a competitive advantage. Such intangible recourses include reputational assets (brands, image, etc.) and technological assets (proprietary technology and know-how).

Human resources or human capital are the productive services human beings offer the firm in terms of their skills, knowledge, reasoning, and decision-making abilities.

RESOURCE

MAIN CHARACTERISTICS

KEY INDICATORS

Tangible

Financial

The firm’s borrowing capacity and its internal funds generation determines its capacity to weather fluctuations in demand and profits overtimes.

Stock of technology in the form of proprietary technology (copyright, patents, trade secrets) and expertise in the application of technology (know-how).

Reputation

Reputation with customers through the ownership of brands, established relationships with customers, reputation of the firm’s products and services.Reputation of the company with suppliers, employees, etc.

Brand recognition

Price premium over competing brands

Percent of repeat buying

Level and consistency of company performance

Human Resources

Training and expertise of employees determine the skills available to the firm.Adaptability of employees determines key aspects of strategic flexibility of the firm.Commitment and loyalty of employees determines the capacity of the firm to attain and maintain competitive advantage.

Educational, technical and professional qualifications of employees

Compensation relative to industry

Record of labor disputes

Employee turnover

Capabilities

Resources are not productive on their own. The most productive tasks require that resources collaborate closely together within teams. The term organizational capabilities is used to refer to a firm’s capacity for undertaking a particular productive activity. Our interest is not in capabilities per se, but in capabilities relative to other firms. To identify the firm’s capabilities we will use the functional classification approach. A functional classification identifies organizational capabilities in relation to each of the principal functional areas.

Functional Area

Capability

Corporate

Financial management

Expertise in strategic control

Effectiveness in motivating and coordinating business units

Management of partnerships

Overall company management/ resource management

Information Management

Comprehensive and effective information system that can be used for managerial decision making

Research and Development

Capability in basic research

Product Design

Design capability

Marketing

Brand management and promotion

Promotion and exploiting reputation for quality

Understand of and responsiveness to market trends

Sales and Fulfillment

Effectiveness in promoting and executing sales

Efficiency and speed of fulfillment

Quality and effectiveness of customer service

Erica Olsen

Erica Olsen is the COO and a co-founder of OnStrategy. She has developed the format and the user interface for the award-winning OnStrategy on-line strategic management system. In addition, she is the author of Strategic Planning Kit for Dummies, 2nd Edition. Erica has developed and reviewed hundreds of strategic plans for public and private entities across the country and around the world. She is a lecturer at University of Nevada Reno and University of Phoenix. She holds a BA in Communications and an MBA in International Management.

Hi Aby, the articles on this site are written by a number of staff members here at OnStrategy. If you’d like to know more about us, pop on by our team page. Also, the author of each article should be visible on the page it’s posted on. Our COO Erica Olsen has earned the distinction of being the author of Strategic Planning Kit for Dummies.